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World Bank EU8 Quarterly Economic Report May 2006

World Bank EU8 Quarterly Economic Report May 2006. Warsaw Media Launch World Bank Office May 30, 2006. Overview. Regional Developments and Prospects Poland Issues Special Topic: Public Finances and Growth in the EU8 Other Interesting Findings. Recent Developments and Prospects.

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World Bank EU8 Quarterly Economic Report May 2006

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  1. World Bank EU8Quarterly Economic ReportMay 2006 Warsaw Media Launch World Bank Office May 30, 2006

  2. Overview • Regional Developments and Prospects • Poland Issues • Special Topic: Public Finances and Growth in the EU8 • Other Interesting Findings

  3. Recent Developments and Prospects • Generally excellent macroeconomic performance in 2005 and into 2006 despite political uncertainty and difficult external environment • Prospects for 2006-07 remain favorable despite recent weakening of emerging market sentiment • Key concerns remain twin deficits in Hungary and overheating in the Baltic States • Slovenia set to adopt euro from 2007, but inflation causing problems for the Baltic States

  4. Generally excellent macroeconomic performance… • Strong output growth with record pace (6%) in the Czech and Slovak Republics, double-digits in Estonia and Latvia, and only Poland disappointing (but improving) • Low inflation except Baltics (notably Latvia at 6%) despite surge in oil prices • Strong current account positions except Baltics, Hungary, and Slovakia (FDI-related) • Improved fiscal positions (except Hungary), with all countries (except Hungary) meeting Maastricht fiscal criteria in 2005

  5. Prospects for 2006-07 remain favorable… • Growth projected to remain strong, with Poland picking up to about 4.5% • Inflation projected to remain low, but little progress in Latvia and Slovakia picking up in 2006 • Current account deficits projected to improve slightly where most needed • But fiscal positions likely to weaken in most countries, including Poland and Hungary

  6. Key concerns remain twin deficits in Hungary and overheating in the Baltic States… • Fiscal deficit may increase further to about 7% of GDP in Hungary, unless new government introduces swift and deep reforms—EC not happy… • Rapid credit growth sustaining large current account deficits and inflation pressures in the Baltic States (plus asset market bubble?)—private domestic and external debt accumulating rapidly • What happens if confidence in currency pegs is lost?

  7. Slovenia set to adopt euro from 2007… • Slovenia an oasis of stability, but at the expense of bold reforms • Lithuania’s application to join Slovenia as the first euro-member among the NMS was rejected despite only marginal shortfall on inflation criterion • Estonia postponed plan by one year unilaterally • Latvia has given up on 2008 • Inflation criterion very hard and early euro adoption may have to be traded off against slowdown in growth, but no easy way to do this

  8. Poland Issues • Short-term growth resilient to political and reform standstill (or worse) • Window of opportunity lost so far over political problems and focus on the past rather than the future • No plan yet for how needed fiscal consolidation will be achieved (once pension reforms costs must be counted) • But tax reform plans should help raise employment

  9. Special Topic: Public Finances and Growth in the EU8 • Our analysis finds that level and structure of public finances matters for growth (and employment) in the region • Distortionary taxes (notably labor taxes) hamper growth, while productive spending (notably core infrastructure and human capital) supports growth (elasticities around 0.3-0.4). • EU8 countries continue to rely excessively on high labor taxes (especially SS), and some (including Poland) still have significant wasteful or inefficient spending programs while spending too little on core infrastructure

  10. Special Topic: Public Finances and Growth in the EU8 (2) • The Baltic States and Slovakia have already reduced spending to moderate levels and may need to finance further tax and SS reductions through other revenues • Other countries should aim to cut overall tax and spending levels • Focus should be on high, employee SS contributions and overly generous or poorly targeted social spending programs (e.g. disability and KRUS in Poland) • Streamlining public administration also important in the Central European countries

  11. Other Interesting Findings… • Impact of Avian Flu so far limited in the region, although poultry producers are suffering from lower demand and prices • Plans for use of EU structural funds in 2007-13 well advanced, but consistency with EU strategic objectives and clear priorities generally not evident • FDI incentives matter little at the national level, but more at the regional level • Slovenia and Estonia have made most progress on Lisbon agenda and KE, while Poland and Slovakia least.

  12. Thanks a lot for your attention!!!

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